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A Northern District of New York judge has re-established the viability of the irrevocable trust as an estate-planning device in a decision shooting down a controversial policy of state and local governments. Senior U.S. District Judge Howard G. Munson found in a first-impression federal matter that a common provision in an irrevocable trust that reserves a limited power of appointment does not render the assets of the trust available and therefore part of the Medicaid-eligibility equation. Munson’s decision in Verdow v. Sutkowy, 5:01-CV-1468, is the first federal court ruling on the issue and a major victory for trust and estate lawyers and their clients. “This is a very common planning tool that had been put under a shadow, with questions raised as to its viability,” said Daniel G. Fish, an elder law practitioner with Freedman and Fish in Manhattan. “To some degree, that shadow has now been lifted.” The issue concerns a virtually standard estate-planning provision that inadvertently almost became part of a Medicaid policy debate. For gift tax and practical considerations unrelated to Medicaid, limited power of appointment provisions were commonly inserted into irrevocable trusts. However, that practice has been called into question in the past few years since the New York City Human Resources Administration and county social services began denying Medicaid to applicants whose assets were held by an irrevocable trust with a power of appointment clause. Even though the trusts remained irrevocable and the trustee lacked the power to tap the principal, state and local officials adopted a position that the speculative potential for revocations rendered the corpus of the trust available to the beneficiary. Thus, they claimed, those assets could be used to determine Medicaid eligibility. Several administrative determinations by the state Health Department upheld that conclusion, which left attorneys in a peculiar position: On one hand, the limited power of appointment provision was necessary to protect the client’s interests; on the other, inclusion of the provision could render the client ineligible for Medicaid. Sholom B. Koplovitz, an estate-planning expert and name partner in Herzog Engstrom & Koplovitz in Albany, N.Y., said that for the past couple of years many elder lawyers have been skirting the issue by inserting a testamentary power of appointment, which could not be exercised during the client’s lifetime, instead of a limited lifetime power of appointment. Now, that end run will not be necessary — assuming Judge Munson’s ruling withstands the expected appeal. “All of my trusts, and I would think all of the trusts of the leading lawyers, have been changed to reflect that issue,” Koplovitz said. But there are still many lifetime powers of appointment out there, he said, adding that Munson’s decision is welcome because “having the ability to change a trust during your lifetime is much better than having it changed by last will and testament. It gives you much more flexibility.” CLASS ACTION Earlier this year, Supreme Court Justice Joseph Gerace of Cayuga County, N.Y., rejected the notion that theoretical revocability rendered an irrevocable trust revocable, and held in favor of a petitioner. However, while Gerace’s decision in Matter of Irene Spetz v. New York State Department of Health, 737 NYS2d 524, was encouraging to elder law practitioners, it was also limited. So, rather than commence a series of Article 78 proceedings in state court and risk contradictory rulings, three upstate attorneys brought a federal civil rights action under 42 U.S.C. � 1983. They sought class action certification on behalf of elderly nursing home patients whose Medicaid applications were rejected because their self-settled trusts included limited power of appointment clauses. Last week, the plaintiffs won a substantial victory when Munson certified the class and granted summary judgment. “This leaves the state’s policy dead in the water,” said Rene H. Reixach of Woods Oviatt Gilman in Rochester, N.Y., counsel for the plaintiffs. “We have solved a major problem for most trusts and estates attorneys in New York and their clients.” Also representing plaintiffs were Cora A. Alsante of Hancock & Estabrook in Syracuse, N.Y., and Walter C. Foulke of Auburn. Representing the defendants were Robert L. Jokl Jr. and Zachary L. Karmen for the Onondaga County Department of Social Services; Frederic R. Westphal of the Cayuga County Department of Health and Human Services; and Assistant Attorney General Patrick F. MacRae of Syracuse. ASSERTION REJECTED Munson largely adopted the reasoning of Gerace. He identified an “apparent flaw” in the defendants’ position — namely that it would essentially “render all trusts revocable for Medicaid evaluation purposes.” Munson also found “entirely speculative” the defendants’ assertion that the plaintiffs could rely on their retained power to finagle a shift in beneficiaries to someone inclined to revoke the trust. “Absent evidence of bad faith or fraud, the decision whether or not to provide Medicaid benefits should not be based upon the remote possibility of collusion,” Munson wrote. “[T]his court cannot accept defendants’ claim that the possibility of future collusion by plaintiffs and amenable beneficiaries renders the trusts revocable and the assets therein an available resource for Medicaid eligibility purposes.” Koplovitz said the power to change a beneficiary affords the client a measure of control. He said the potential for collusion is obvious, but agreed with the court that that possibility does not warrant the remedy suggested by the defendants. “I don’t know how the local courts will treat this district court opinion, but certainly it has strong precedential affect,” Koplovitz said.

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